INERTIA WEALTH CREATORS

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Who is our worst enemy in investing? We ourselves!

March 1, 2016

"The investor's chief problem - and even his worst enemy - is likely to be himself" - Ben Graham (the father of value investing)

 

Annual studies conducted by Dalbar for US markets throw some very grim and worrying statistics about the investor behaviour. Over a period of 20 years, while S&P 500 index generated a compounded annual growth rate of 8% per year, the active fund managers (who are paid to beat the index!) actually returned lower than the S&P 500 (at 6-7% on average). Crazy, isn't it? However, this loss inflicted by active fund managers is nothing vs what investors incurred by themselves... The average equity fund investor actually generated a return of only ~2% per year because of buying/selling his or her funds at the worst possible times (putting money in the funds near market peaks and withdrawing near market bottoms)! So much for all the financial intelligence and expertise available all around. We do not have hard data about India but would not be surprised if it were much worse than this...

 

In essence, all the painstaking efforts at 'market timing' by fund managers as well as individual investors actually boomerang! So, why is that? Simply because while continuously trying to chase momentum, the fundamentals of investing take a back seat while emotions take over. And is it then surprising that most investors end up buying near market tops - when greed is all pervasive - and end up junking their investments near bottoms, when there is blood on the street and everyone is fearful...

 

So what is the way out? STOP being emotional and do not try to time the market! Invest in fundamentally good companies for long-term and then back your decision. Instead of forecasting the market, work on your own equity allocation weight. If market goes significantly up and hence your portfolio becomes overweight equities, reallocate a portion to fixed-income. If market goes down, do the reverse. Easier said than done isn't it?

 

Thats what we intend to help our clients to do...

 

Lets stop worrying about the markets and start working on your allocation.

 

Interested?

 

 

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